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THE BOSTON BEER COMPANY, INC. Case Solution & Answer

THE BOSTON BEER COMPANY, INC.

QUESTION # 04:A comparison and discussion of your valuation with the actual IPO price and the closing price on the first day of trade in 1995 (see finance.yahoo.com for historical prices). What does this comparison tell you, if anything, about IPO underpricing?

ANSWER 4:

The actual amount of Initial public offering price (IPO) of the Boston Beer Company (BBC) is $12.5as compared to the market value of share on the first day is $27. This means that price offer from the Boston Bear Company is less than the intrinsic value of the Boston Beer Company (BBC). This shows that company has offered its shares in an initial public offering (IPO) at discounted price. As the Boston Beer Company first day trade was close at $27. These figures of initial public offering show that company has enough option to increase its earning by issuing initial public offering (IPO), but investor of the stock market in which Boston Beer Company is listed show the keen interest in the shares of Boston Beer Company. As the investor of the Boston Beer Company believes that the actual worth of the company would be above the market value per share of Boston Beer Company (BBC). The investor in the Boston Beer Company (BBC) also knows the financial strategies of the company that the company is looking forward to introduce the new products in its market line of superior quality beer in the United States. Investor of the Boston Beer Company (BBC) knows the financial strategies of the Boston Beer Company.

Discounted Cash Flow Technique:

The discounted cash flow method is used for valuation of the project on a present value basis. The cash flows of the project are calculated and discounted by the weighted average cost of equity to calculate the present value of the cash flows. Free cash flows of Boston Beer Company are calculated by adding back all the non-cash expenses that are amortization and depreciation, and changes in working capital and capital expenditure to the net income of the company. The cost of equity is used as the discount rate to discount the cash flows. Cost of equity is calculated by using the capital asset pricing model. Few assumptions of the capital asset pricing model to be undertaken which is, risk free rate of return is assumed to be 5.35 percent, beta is assumed to be 1 and the average market risk premium is assumed to be 5 percent. There are certain limitations and assumptions of the capital asset pricing model (CAPM) that is investor would have the diversified portfolio, investors can invest its investment at risk free rate of return, market is totally perfect and market premium remain same throughout the decision. The cost of equity using the formula of the capital asset pricing model is 10.35 percent. The present value of free cash flows of Boston Beer Company is $4,077,000 and per share enterprise value of Boston Beer Company is$0.22. As shown in exhibit 4.

Multiple Valuation Technique:

The multiple Valuation technique is used to calculate the enterprise value per share. Boston Beer Company per share price can be calculated by using different multiples, that is sales multiples, earnings before interest, tax, amortization and depreciation (EBITDA) multiple or net earning multiple. Sales, EBITDA and EAT per share price is calculated by dividing the enterprise value with the value of sales, EBITDA and EAT. The per share value of using the sales multiple is $0.03 in the year 1995. The per share value of Boston Beer Company in earnings before interest, tax amortization and depreciation (EBITDA) multiple is $0.40. Per share value using the earnings is $0.77. All these calculations are shown in exhibit 3.

APPENDICES:

EXHIBIT 1:

EXHIBIT 2:

EXHIBIT # 03

EXHIBIT # 04:

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